Canadian firm reportedly buying Putnam

Power Corp. said to be in $3.9 bln deal for Marsh's asset-management unit

By

MurrayColeman

JohnSpence

SAN FRANCISCO (MarketWatch) -- Canadian holding company Power Corp. has come out on top in the bidding for one of Boston's oldest financial institutions, Putnam Investments, according to a media report Friday.

Marsh & McLennan Companies Inc.
MMC, +0.39%
has agreed in principle to sell its Putnam money-management unit to Power Corp. for $3.9 billion, according to The Wall Street Journal.

"Marsh is getting a fair-market value for Putnam," Justin Fuller, a Morningstar Inc. analyst, said on Friday morning in a telephone interview with MarketWatch. "It's not a great deal or a rich price for such a large asset-management business."

At slightly less than $4 billion, Power Corp. would be paying roughly 2% of Putnam's total assets under management, he added. " That's about the going rate now for a mutual-fund and asset-management business," Fuller said.

As a longtime owner of Putnam, the insurance conglomerate would likely face a sizeable capital gains tax on the sale.

"A spin-off would've been a tax-free transaction," Fuller pointed out. "There might be a way to complete a tax-efficient sale of the company. But on first blush, a big question has to be how much of that $3.9 billion price tag Marsh will actually be able to realize after taxes."

Shares of Marsh lost 12 cents to $30.60 in late-afternoon dealings Friday on the news. Analysts had been mixed about a deal, saying that much of the restructuring work to fix Putnam's compliance issues with regulators and performance problems with its family of mutual funds had been completed.

With a stock market still moving up and key asset managers attracting strong inflows into popular funds, some industry observers see a lot of upside left in Putnam.

"Their management has done a nice job of rebuilding the brand," Jeff Keil, a Denver, Colo.-based mutual-fund consultant, said. "They took regulators' concerns to heart and moved aggressively to make substantive changes in how Putnam operated its funds."

Keil worked on a research project for Putnam's mutual-funds board earlier in 2006. While he believes the asset manager should improve its profitability in coming years, Keil also says that Marsh obviously wants to focus on its core insurance-services franchise.

At the same time, he believes Power Corp. would gain a potential sleeping giant in a lucrative asset-management field.

"Performance has still not met Putnam's own expectations," Keil said. "But at this point, their funds business is poised for a nice comeback."

Still, a turnaround isn't complete, says Allan Roth. The Colorado Springs, Colo.-based adviser and ex-corporate finance officer is still cautious about using Putnam funds with his clients. "They're still too expensive and their performance hasn't rebounded enough to make them one of the elite fund companies yet," he said. "In my mind, they've got a long way to go to be one of the top fund families."

A deal between Marsh and Power Corp., previously identified as a frontrunner in Marsh's auction of the unit, is expected to be announced early next year pending fund-shareholder approval, The Journal reported, citing unnamed people familiar with the matter. See Wall Street Journal story (subscription required).

A Putnam spokeswoman referred inquiries to Marsh. A Marsh spokesman declined to comment on the report.

For Power Corp., Canada's biggest mutual-fund operator via its majority ownership of IGM Financial Inc., the purchase would provide a significant footprint in the U.S. money-management business, The Journal said, adding that expansion has been a priority for Power Corp.'s chairman, Paul Desmarais, one of the wealthiest men in Canada.

The deal still needs the approval of Putnam employees who own shares in the company, Putnam mutual-fund shareholders and the board that oversees the funds, The Journal said. A marked deterioration in Putnam's business also could delay or shelve a deal, the newspaper said.

Power Corp. doesn't plan drastic changes in Putnam's management or structure, which makes the remaining necessary approvals more likely though not guaranteed, according to the report.

Power Corp. emerged as the leader in the bidding, ahead of rivals Amvescap Plc
AVZ, +3.64%
of the United Kingdom and UniCredito Italiano SpA (UC) of Italy, earlier in December. See previous FundWatch.

UniCredito was seen as a likely Putnam suitor because it owns Boston-based money manager Pioneer Investments. Amvescap saw its shares rise as much as 6% Friday morning.

Michael Cherkasky, Marsh's chief executive, in September said the insurance giant was conducting a "market check" to determine Putnam's value.

Putnam suffered big outflows after it settled charges of improper trading in its mutual funds, and was also hit by the bear market for stocks that began in 2000.

Yet some analysts say Putnam, which managed $191 billion in assets through October, is showing signs of improved performance. This year through September, Putnam contributed 20.5% to Marsh's operating income. See related story.

Power Corp. is expected to keep Putnam President and CEO Charles "Ed" Haldeman Jr., who took over amid the share-trading scandal, at the helm, The Journal said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.